Saumitra, Bhaduri (2012): Why do firms issue equity? Some evidence from an emerging economy, India.
Download (453kB) | Preview
In contrast to the existing empirical research on the pecking order hypothesis which has been largely confined to the United States and a few other advanced countries, this paper attempts to test the hypothesis for an emerging economy through a case study of the Indian Corporate sector. A well diverse sample of 556 manufacturing firms over the period 1997-2007 is used in the paper to test the pecking order hypothesis. The study finds strong evidence in favour of the pecking order hypothesis – a result that stands startlingly odd to the most recent evidences against pecking order theory in developed countries (Fama and French, (2005), Frank And Goyal (2003, Lemmon and Zender (2004), Leary and Roberts (2004)).
|Item Type:||MPRA Paper|
|Original Title:||Why do firms issue equity? Some evidence from an emerging economy, India|
|Keywords:||Pecking order, Capital structure, emerging economy, India|
|Subjects:||G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill|
|Depositing User:||Saumitra Bhaduri|
|Date Deposited:||11. Apr 2012 15:38|
|Last Modified:||14. Feb 2013 13:33|
Bhaduri, Saumitra, 1999. Do Indian Firms Follow the Pecking Order Hypothesis, International Journal of Development Banking 17, 13-28
Bharath, Sreedhar, Paolo Pasquariello, and Goujun Wu, 2005, Does asymmetric information drive capital structure decisions?, Working Paper, University of Michigan.
Bolton, Patrick and Mathias Dewatripont, 2005, Contract Theory, The MIT Press, Cam-bridge MA.
Bradley, Michael and Michael R. Roberts, 2003, The pricing and structure of debt covenants, Working Paper, Duke University.
Booth, L., V. Aivazian, A. Demirgue-Kunt and V. Maksimovic 2001, “Capital Structure in Developing Countries”, Journal Finance, Vol. 56, pp. 97-129.
Brav, Alon, Roni Michaely, Michael R. Roberts and Rebecca Zarutskie, 2005, Evidence on the Trade off between Risk and Return for IPO and SEO Firms, Working Paper, DukeUniversity.
Brav, Omer, 2004, How does access to public capital markets affect firm's capital structure?, Working Paper, University of Pennsylvania.
Cherian, Samuel, 1996. The Stock Market as a Source of Finance: A Comparison of U.S. and Indian Firms, Policy Research Working Paper No. 1592, The World Bank.
Chirinko, Robert S and Singha, Anuja R., 2000. Testing Static Tradeoff Against Pecking Order Models of Capital Structure: A Critical Comment, Journal of Financial Economics 58, 417-425
Cobham, David, and Subramaniam, Ramesh, 1998. Corporate Finance in Developing Countries: New evidence for India, World Development 26, 1033-1045
Chang, Xin, Sudipto Dasgupta, and Gilles Hilary, 2004, Analyst coverage and capital structure decisions, Working Paper, Hong Kong University of Science and Technology 39.
Chen, Long and Shelly Zhao, 2003, The modified pecking order theory: New empirical evidence from corporate financing decisions, Working Paper, Michigan State University.
Choe, Hyuk, Ronald Masulis, and Vikram Nanda, 1993, Common stock offerings across the business cycle: theory and evidence, Journal of Empirical Finance, 1: 3-31. Cooney, John and Avner Kalay, 1993, Positive information from equity issue announcements, Journal of Financial Economics 33: 149-172.
Denis, David J. and Vassil T. Mihov, 2003, The choice among bank debt, non-bank debt, non-bank private debt, and public debt, Journal of Financial Economics (forthcoming).
Dittmar, Amy, and Anjan Thakor, 2007, Why do firms issue equity?, Journal of Finance,62(1): 1-54.
Doms, Mark and Timothy Dunne, 1998, Capital adjustment patterns in manufacturing plants, Review of Economic Dynamics, 1: 409-429.
Dybvig, Philip H. and Jaime F. Zender, 1991, Capital structure and dividend irrelevance with asymmetric information, The Review of Financial Studies 4: 201-219.
Fama, Eugene F. and Kenneth R. French, 2002, Testing trade-off and pecking order predictions about dividends and debt, The Review of Financial Studies 15(1): 1-33.
Fama, Eugene F. and Kenneth R. French, 2005, Financing decisions: Who issues stock?,Journal of Financial Economics 76: 549-582.
Faulkender, Michael and Mitchell Petersen, 2004, Does the source of capital affect capital structure?, Review of Financial Studies (forthcoming).
Faulkender, Michael and Rong Wang, 2004, Corporate financial policy and the value of cash, Journal of Finance (forthcoming).
Fischer, Edwin. O., Robert Heinkel and Josef Zechner, 1989, Dynamic capital structure choice: Theory and tests, Journal of Finance 44(1): 19-40.
Frank, Murray Z. and Vidhan K. Goyal, 2003, Testing the pecking order theory of capital structure, Journal of Financial Economics 67: 217-248.
Fulghieri, Paolo and Dmitry Lukin, 2001, Information production, dilution costs and ptimal security design, Journal of Financial Economics 61: 3-42.
Gomes, Armando and Gordon Phillips, 2005, Why do public firms issue private and public equity, convertibles and debt?, Working Paper, University of Pennsylvania.
Graham, John R., 1996, Debt and the Marginal Tax Rate, Journal of Financial Eco- nomics 41: 41-73.
Graham, John R. and Campbell Harvey, 2001, The theory and practice of corporate finannce: Evidence from the field, Journal of Financial Economics 60: 187-24 Greene, William, 2003, Econometric Analysis, 5th Edition.
Halov, Nikolay and Florian Heider, 2004, Capital Structure, Asymmetric Information and Risk, Working Paper, New York University.
Hansen, B., 1999, Threshold effects in non-dynamic panels: Estimation, testing and inference. Journal of Econometrics, Volume 93, Issue 2, December 1999, Pages 345-368.
Harris, Milton and Artur Raviv, 1991, The theory of capital structure, Journal of Finance 46: 297 – 355. Helwege, Jean and Nellie Liang, 1996, Is there a pecking order? Evidence from a panel of IPO firms, Journal of Financial Economics 40: 429-458.
Hennessy, Christopher A. and Dmitry Livdan, 2006, Do the pecking order's predictions follow from its premises? Working Paper University of California, Berkeley.
Houston, James and C. James, 1996, Bank information and monopolies of private and Public debt claims, Journal of Finance 51(5): 1863 – 1889.
Hovakimian, Armen 2004, Are observed capital structure determined by equity market timing?, Journal of Financial and Quantitative Analysis (forthcoming).
Hovakimian, Armen, Tim Opler and Sheridan Titman, 2001, The debt-equity choice, Journal of Financial and Quantitative Analysis 36(1): 1-24.
Jung, Kooyul, Yong Cheol Kim and Rene Stulz, 1996, Timing, investment opportunities, managerial discretion and the security issue decision, Journal of Financial Economics 42: 159-185.
Kim, Chang-Soo, David C. Mauer, and Ann E. Sherman, 1998, The determinants of corporate liquidity: Theory and evidence, Journal of Financial and Quantitative Analysis 33: 335-359.
Korajczyk, Robert, Deborah Lucas and Robert McDonald, 1990, Understanding stock price behavior around the time of equity issues, in R.
Glenn Hubbard, ed.: Asymmetric Information, Corporate Finance, and Investment, University of Chicago Press, Chicago, 257-277.
Korajczyk, Robert, Deborah Lucas and Robert McDonald, 1991, The effects of information releases on the pricing and timing of equity issues, The Review of Financial Studies 4 685-708.
Korajczyk, Robert and Amnon Levy, 2003, Capital structure choice: Macroeconomic conditions and financial constraints, Journal of Financial Economics 68: 75-109.
Leary, M., Roberts, M. (2004). Financial Slack and Tests of the Pecking Order’s Financing Hierarchy, Working Paper, Duke University.
Leary, Mark T. and Michael R. Roberts, 2005, Do firms rebalance their capital struc- tures?, Journal of Finance 60: 2575 – 2619.
Lemmon, Michael L., Michael R. Roberts and Jaime F. Zender, 2006, Back to the beginning: Persistence and the cross-section of corporate capital structure, Working Paper, University of Pennsylvania.
Lemmon, Michael L. and Jaime F. Zender, 2004, Debt capacity and tests of capital structure theories, Working Paper, University of Utah.
Marsh, Paul, 1982, The choice between debt and equity: An empirical study, Journal of Finance 37: 121-144.
Mayer, Colin and Oren Sussman, 2004, A new test of capital structure, Working Paper, University of Oxford.
Myers, Stewart C., 1977, Determinants of corporate borrowing, Journal of Financial Economics 5: 147-175.
Myers, Stewart C., 1984, The capital structure puzzle, Journal of Finance 39: 575-592.
Myers, Stewart C. and Majluf Nicholas S., 1984, Corporate financing and investment decisions when firms have information that investors do not have, Journal of Financial Economics 13:187-221.
Modigliani, F. and M. Miller 1958, The Cost of Capital, Corporation Finance and the Theory of Investment, American Economic Review, Vol. 48, pp. 261-297.
Modigliani, F. and M.H. Miller (1963), Corporate Income Taxes and the Cost of Capital: A Correction, American Economic Review, Vol. 53, pp. 433–443.
Opler, Tim, Lee Pinkowitz, Rene Stulz and Rohan Williamson, 1999, The determinants and implications of corporate cash holdings, Journal of Financial Economics 52:3-46.
Petersen, Mitchell, 2005, Estimating standard errors in finance panel data sets: Comparing approaches, Working Paper, Northwestern University.
Rajan, Raghuram G. and Luigi Zingales, 1995, What do we know about capital structure: Some evidence from international data, Journal of Finance 50: 1421-1460.
Strebulaev, Ilya, 2004, Do tests of capital structure theory mean what they say? Working Paper Stanford University.
Shyam-Sunder, Lakshmi and Stewart C. Myers, 1999, Testing static trade off against pecking order models of capital structure, Journal of Financial Economics 51(2): 219- 244.
Singh Ajit., 1995. Corporate Financial Patterns in Industrializing Economies: A Comparative International Study, Technical Chapter 2, International Finance Corporation.
Singh Ajit., J. Hamid, B. Salimi, Y.Nakano, (1992), “Corporate Financial Structures in Developing Countries”, Technical Chapter 1, International Finance Corporation.
Titman, Sheridan and Roberto Wessels, 1988, The determinants of capital structure, Journal of Finance 43: 1-19.
Whited, Toni, 2004, External finance constraints and the intertemporal pattern of intermittent investments, Working Paper, University of Wisconsin
Welch, Ivo, 2004, Capital Structure and Stock Returns, Journal of Political Economy 112: 106-131.